What can we learn from the Massachusetts tax holiday?

September 13, 2012

Creativity. It is perhaps one of the least likely words one might use to characterize the current approach to the fiscal situation in the United States. It might also, however, end up as a vital piece of the economic recovery puzzle that policy makers face today. In the midst of an election where the challenging candidate for the presidency has said, “I believe in an America where millions of Americans believe in an America that’s the America millions of Americans believe in,” it is clear there has not been an abundance of innovation emanating from either party. Thus, it is important to highlight the few creative ideas we come across in American economics these days.

A little over a month ago, the Massachusetts state legislature approved a sales tax-free weekend for the second weekend of August, the eighth time in nine years that has been done. The tax holiday, covering items under $2,500, drew thousands of additional consumers. People even road-tripped from neighboring states to capitalize on the savings. Many are suffering from the economic downturn and needed the temporary tax cut to buy essential goods for the upcoming school year and holiday season. The artificially induced version of Black Friday also affected the supply-side of goods markets with stores such as Best Buy saturating their shelves and calling in additional employees to work during the weekend.

The effectiveness of tax holidays remains subject to debate, with some economists and professors calling it a political gimmick and a Populist attempt to coax the public into doing something they inevitably would have done without the 6.25 percent savings. Additionally, Massachusetts Gov. Deval Patrick expected the revenue shortfall from the weekend to hit $20 million and passed a supplemental budget through the legislature to offset the losses. Nonetheless, tax holidays are still important because they aim to jump start the fundamental cog in our economic system: consumer demand. Yes, the Massachusetts holiday primarily affects only state residents, and yes, the demand spike is extremely short-term. But for once, we see a policy that strikes at the heart of our sluggish economic recovery and injects local businesses and manufacturers with the extra sales they desperately need to stay afloat.

Consider the alternative: a revenue shortfall caused by loosened tax policy on wealthy individuals and large companies. Assuming wealthy individuals would actually invest their additional savings — a huge assumption — into private companies, it is growing increasingly difficult for conservative economists to argue that these investments would actually trickle down to the less fortunate and unemployed, especially in light of data that shows American companies are sitting on record amounts of cash. This isn’t to say that every corporation in America is comprised of fat, Tammany Hall white guys with toilet paper rolls made of $20 bills stealing our money. Why would companies spend money to increase manufacturing and hire more workers when the public is buying fewer and fewer of their products? Simple: They wouldn’t. Anybody familiar with even the most basic of economics should know that.

So although the Massachusetts tax holiday is not the grand solution to our financial woes, it is a short-term economic defibrillator that has proven on a small scale that lawmakers must take their cues from successful local economies and come up with fresh ideas to boost middle-class spending.

A version of this article appeared in the Thursday, Sept. 13 print edition. Sameer Jaywant is a staff columnist. Email him at [email protected]